UNITED STATES | |||||||||||||||
Washington, D.C. 20549 | |||||||||||||||
FORM 10-Q | |||||||||||||||
(Mark One) | |||||||||||||||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDEDJUNE 30, 2004. | ||||||||||||||
OR | |||||||||||||||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE | ||||||||||||||
ACT OF 1934 FOR THE TRANSITION PERIOD FROM | ______ | to | _______ | : | |||||||||||
Commission File Number 0-26584 | |||||||||||||||
BANNER CORPORATION | |||||||||||||||
(Exact name of registrant as specified in its charter) | |||||||||||||||
Washington | 91-1691604 | ||||||||||||||
10 South First Avenue, Walla Walla, Washington 99362 | |||||||||||||||
(Address of principal executive offices and zip code) | |||||||||||||||
Registrant's telephone number, including area code: (509) 527-3636 | |||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No | |||||||||||||||
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). | |||||||||||||||
Yes X No | |||||||||||||||
APPLICABLE ONLY TO CORPORATE ISSUERS | |||||||||||||||
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. | |||||||||||||||
Title of class: | As of July 31, 2004 | ||||||||||||||
* Includes 438,985 shares held by employee stock ownership plan (ESOP) that have not been released, committed to be released, or allocated to participant accounts. | |||||||||||||||
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION | |||
Item 1 - Financial Statements. The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows: | |||
Consolidated Statements of Financial Condition as of June 30, 2004 and December 31, 2003 | 2 | ||
Consolidated Statements of Income for the Quarters and Six Months Ended June 30, 2004 and 2003 | 3 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended June 30, 2004 | 4 | ||
Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2004 and 2003 | 5 | ||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 | 7 | ||
Selected Notes to Consolidated Financial Statements | 9 | ||
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation | |||
Special Note Regarding Forward-Looking Statements | 13 | ||
General | 13 | ||
Recent Developments and Significant Events | 13 | ||
Comparison of Financial Condition at June 30, 2004 and December 31, 2003 | 13 | ||
Comparison of Results of Operations for the Quarters and Six Months Ended June 30, 2004 and 2003 | 14 | ||
Asset Quality | 20 | ||
Liquidity and Capital Resources | 21 | ||
Financial Instruments with Off-Balance-Sheet Risk | 22 | ||
Capital Requirements | 23 | ||
Item 3 - Quantitative and Qualitative Disclosures About Market Risk | |||
Market Risk and Asset/Liability Management | 24 | ||
Sensitivity Analysis | 24 | ||
Item 4 - Controls and Procedures | 28 | ||
PART II - OTHER INFORMATION | |||
Item 1 - Legal Proceedings | 29 | ||
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 29 | ||
Item 3 - Defaults upon Senior Securities | 29 | ||
Item 4 - Submission of Matters to a Vote of Stockholders | 29 | ||
Item 5 - Other Information | 29 | ||
Item 6 - Exhibits and Reports on Form 8-K | 30 | ||
SIGNATURES |
1
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
June 30, 2004 (Unaudited) and December 31, 2003
(Unaudited) | ||||||||||||
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| June 30 |
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| December 31 |
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ASSETS | 2004 | 2003 | ||||||||||
Cash and due from banks | $ | 53,699 | $ | 77,298 | ||||||||
Securities available for sale, cost $606,539 and $670,033 | ||||||||||||
Encumbered | 42,815 | 55,228 | ||||||||||
Unencumbered | 557,233 | 619,714 | ||||||||||
600,048 | 674,942 | |||||||||||
Securities held to maturity, fair value $51,697 and $28,402 | ||||||||||||
Encumbered | 225 | 216 | ||||||||||
Unencumbered | 50,986 | 27,016 | ||||||||||
51,211 | 27,232 | |||||||||||
Federal Home Loan Bank stock | 35,387 | 34,693 | ||||||||||
Loans receivable: | ||||||||||||
Held for sale, fair value $5,937 and $16,199 | 5,887 | 15,912 | ||||||||||
Held for portfolio | 1,903,532 | 1,711,013 | ||||||||||
Allowance for loan losses | (28,037 | ) | (26,060 | ) | ||||||||
1,881,382 | 1,700,865 | |||||||||||
Accrued interest receivable | 14,341 | 13,410 | ||||||||||
Real estate owned, held for sale, net | 3,564 | 2,967 | ||||||||||
Property and equipment, net | 32,815 | 22,818 | ||||||||||
Goodwill and other intangibles, net | 36,441 | 36,513 | ||||||||||
Deferred income tax asset, net | 7,024 | 1,941 | ||||||||||
Bank-owned life insurance | 34,529 | 33,669 | ||||||||||
Other assets | 9,629 | 8,965 | ||||||||||
$ | 2,760,070 | $ | 2,635,313 | |||||||||
LIABILITIES | ||||||||||||
Deposits: | ||||||||||||
Non-interest-bearing | $ | 209,704 | $ | 205,656 | ||||||||
Interest-bearing | 1,622,889 | 1,465,284 | ||||||||||
1,832,593 | 1,670,940 | |||||||||||
Advances from Federal Home Loan Bank | 555,058 | 612,552 | ||||||||||
Junior subordinated debentures | 72,168 | 56,703 | ||||||||||
Other borrowings | 72,539 | 69,444 | ||||||||||
Accrued expenses and other liabilities | 17,911 | 18,444 | ||||||||||
Deferred compensation | 4,739 | 4,252 | ||||||||||
Income taxes payable | 2,768 | 178 | ||||||||||
2,557,776 | 2,432,513 | |||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||
Common stock - $0.01 par value per share, 27,500,000 | ||||||||||||
11,630,434 shares and 11,473,311 shares outstanding at | 125,438 | 123,375 | ||||||||||
Retained earnings | 85,494 | 80,286 | ||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||
Unrealized gain (loss) on securities available for sale | (4,461 | ) | 3,191 | |||||||||
Unearned shares of common stock issued to Employee | ||||||||||||
438,985 and 434,299 restricted shares outstanding | ||||||||||||
at June 30, 2004 and December 31, 2003, | (3,628 | ) | (3,589 | ) | ||||||||
Carrying value of shares held in trust for stock | (3,669 | ) | (3,554 | ) | ||||||||
Liability for common stock issued to deferred, stock related, | 3,120 | 3,091 | ||||||||||
(549 | ) | (463 | ) | |||||||||
202,294 | 202,800 | |||||||||||
$ | 2,760,070 | $ | 2,635,313 |
See notes to consolidated financial statements
2
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
For the Quarters and Six Months Ended June 30, 2004 and 2003
Quarters Ended | Six Months Ended | |||||||||||
June 30 | June 30 | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
INTEREST INCOME: | ||||||||||||
Loans receivable | $ | 30,298 | $ | 29,396 | $ | 59,317 | $ | 58,240 | ||||
Mortgage-backed securities | 4,394 | 3,183 | 8,921 | 6,235 | ||||||||
Securities and cash equivalents | 3,140 | 2,833 | 6,221 | 5,655 | ||||||||
37,832 | 35,412 | 74,459 | 70,130 | |||||||||
INTEREST EXPENSE: | ||||||||||||
Deposits | 8,404 | 8,851 | 16,268 | 17,722 | ||||||||
Federal Home Loan Bank advances | 4,962 | 5,747 | 10,087 | 11,447 | ||||||||
Junior subordinated debentures/Trust preferred securities | 843 | 546 | 1,535 | 1,113 | ||||||||
Other borrowings | 223 | 203 | 460 | 375 | ||||||||
14,432 | 15,347 | 28,350 | 30,657 | |||||||||
Net interest income before provision for loan losses | 23,400 | 20,065 | 46,109 | 39,473 | ||||||||
PROVISION FOR LOAN LOSSES | 1,450 | 2,250 | 2,900 | 4,500 | ||||||||
Net interest income | 21,950 | 17,815 | 43,209 | 34,973 | ||||||||
OTHER OPERATING INCOME: | ||||||||||||
Loan servicing fees | 347 | (83 | ) | 613 | 447 | |||||||
Other fees and service charges | 2,057 | 1,839 | 3,900 | 3,497 | ||||||||
Mortgage banking operations | 1,452 | 3,244 | 2,704 | 5,306 | ||||||||
Gain on sale of securities | 62 | -- | 73 | 3 | ||||||||
Miscellaneous | 207 | 383 | 651 | 948 | ||||||||
Total other operating income | 4,125 | 5,383 | 7,941 | 10,201 | ||||||||
OTHER OPERATING EXPENSES: | ||||||||||||
Salary and employee benefits | 13,024 | 11,589 | 25,127 | 22,800 | ||||||||
Less capitalized loan origination costs | (1,891 | ) | (1,975 | ) | (3,378 | ) | (3,550 | ) | ||||
Occupancy and equipment | 2,645 | 2,349 | 5,132 | 4,721 | ||||||||
Information/computer data services | 1,016 | 868 | 2,042 | 1,706 | ||||||||
Professional services | 790 | 844 | 1,705 | 1,274 | ||||||||
Advertising | 1,341 | 801 | 2,449 | 1,667 | ||||||||
Miscellaneous | 2,611 | 2,799 | 5,287 | 5,714 | ||||||||
Total other operating expenses | 19,536 | 17,275 | 38,364 | 34,332 | ||||||||
Income before provision for income taxes | 6,539 | 5,923 | 12,786 | 10,842 | ||||||||
PROVISION FOR INCOME TAXES | 1,991 | 1,802 | 3,875 | 3,292 | ||||||||
NET INCOME | $ | 4,548 | $ | 4,121 | $ | 8,911 | $ | 7,550 | ||||
Earnings per common share (see Note 5): | ||||||||||||
Basic | $ | 0.41 | $ | 0.38 | $ | 0.80 | $ | 0.70 | ||||
Diluted | $ | 0.39 | $ | 0.37 | $ | 0.76 | $ | 0.68 | ||||
Cumulative dividends declared per common share: | $ | 0.16 | $ | 0.15 | $ | 0.32 | $ | 0.30 | ||||
See notes to consolidated financial statements
3
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (in thousands except for per share amounts)
For the Quarters and Six Months Ended June 30, 2004 and 2003
Quarters Ended | Six Months Ended | |||||||||||
June 30 | June 30 | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
NET INCOME | $ | 4,548 | $ | 4,121 | $ | 8,911 | $ | 7,550 | ||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF | ||||||||||||
Unrealized holding gain (loss) during the period, net of | (10,483 | ) | (236 | ) | (7,605 | ) | (146 | ) | ||||
Less adjustment for (gains)/losses included in net | (40 | ) | -- | (47 | ) | (2 | ) | |||||
Other comprehensive income (loss) | (10,523 | ) | (236 | ) | (7,652 | ) | (148 | ) | ||||
COMPREHENSIVE INCOME (LOSS) | $ | (5,975 | ) | $ | 3,885 | $ | 1,259 | $ | 7,402 |
See notes to consolidated financial statements
4
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (In thousands, except per share amounts)
For the Six Months Ended June 30, 2004 and 2003
Common Stock and Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Unearned Restricted ESOP Shares | Value, Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans | Stockholders' Equity | ||||||||||||||
BALANCE, January 1, 2003 | $ | 120,554 | $ | 70,813 | $ | 3,488 | $ | (4,262 | ) | $ | (216 | ) | $ | $190,377 | |||||
Net income | 7,550 | 7,550 | |||||||||||||||||
Change in valuation of securities available for sale, net of income | (148 | ) | (148 | ) | |||||||||||||||
Cash dividend on common stock ($.30/share cumulative) | (3,397 | ) | (3,397 | ) | |||||||||||||||
Proceeds from issuance of common stock for exercise of stock | 437 | 437 | |||||||||||||||||
Net issuance of stock through employees' stock plans, including | 393 | (2 | ) | (396 | ) | (5 | ) | ||||||||||||
Amortization of compensation related to Management | 67 | 67 | |||||||||||||||||
BALANCE, June 30, 2003 | $ | 121,384 | $ | 74,966 | $ | 3,340 | $ | (4,264 | ) | $ | (545 | ) | $ | 194,881 | |||||
BALANCE, January 1, 2004 | $ | 123,375 | $ | 80,286 | $ | 3,191 | $ | (3,589 | ) | $ | (463 | ) | $ | $202,800 | |||||
Net income | 8,911 | 8,911 | |||||||||||||||||
Change in valuation of securities available for sale, net of income | (7,652 | ) | (7,652 | ) | |||||||||||||||
Cash dividend on common stock ($.32/share cumulative) | (3,703 | ) | (3,703 | ) | |||||||||||||||
Purchase and/or retirement of common stock | (553 | ) | (553 | ) | |||||||||||||||
Proceeds from issuance of common stock for exercise of stock | 2,512 | 2,512 | |||||||||||||||||
Net issuance of stock through employees' stock plans, including | 104 | (39 | ) | (159 | ) | (94 | ) | ||||||||||||
Amortization of compensation related to MRP | 73 | 73 | |||||||||||||||||
BALANCE, June 30, 2004 | $ | 125,438 | $ | 85,494 | $ | (4,461 | ) | $ | (3,628 | ) | $ | (549 | ) | $ | 202,294 |
See selected notes to consolidated financial statements
5
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (continued) ( in thousands)
For the Six Months Ended June 30, 2004 and 2003
2004 | 2003 | |||||||||||
COMMON STOCK, SHARES ISSUED: | ||||||||||||
Number of shares, beginning of period | 13,201 | 13,201 | ||||||||||
Number of shares, end of period | 13,201 | 13,201 | ||||||||||
LESS COMMON STOCK RETIRED: | ||||||||||||
Number of shares, beginning of period | (1,728 | ) | (1,894 | ) | ||||||||
Purchase and retirement of common stock | (20 | ) | (3 | ) | ||||||||
Issuance of common stock to deferred compensation | 177 | 63 | ||||||||||
Number of shares retired, end of period | (1,571 | ) | (1,834 | ) | ||||||||
SHARES ISSUED AND OUTSTANDING, END OF PERIOD | 11,630 | 11,367 | ||||||||||
UNEARNED, RESTRICTED ESOP SHARES: | ||||||||||||
Number of shares, beginning of period | (434 | ) | (516 | ) | ||||||||
Adjustment of earned shares | (5 | ) | -- | |||||||||
Number of shares, end of period | (439 | ) | (516 | ) |
See notes to consolidated financial statements
6
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Six Months Ended June 30, 2004 and 2003
2004 | 2003 | |||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 8,911 | $ | 7,550 | ||||||||
Adjustments to reconcile net income to net cash provided by | ||||||||||||
Depreciation and amortization | 2,312 | 2,859 | ||||||||||
Loss (gain) on sale of securities | (73 | ) | (3 | ) | ||||||||
Increase in cash surrender value of bank-owned life insurance | (860 | ) | (939 | ) | ||||||||
Gain on sale of loans, excluding capitalized servicing rights | (2,644 | ) | (4,403 | ) | ||||||||
Loss (gain) on disposal of real estate held for sale and property and equipment | (107 | ) | (18 | ) | ||||||||
Provision for losses on loans and real estate held for sale | 2,900 | 4,810 | ||||||||||
Federal Home Loan Bank stock dividend | (694 | ) | (983 | ) | ||||||||
Net change in: | ||||||||||||
Loans held for sale | 10,025 | (236 | ) | |||||||||
Other assets | (2,882 | ) | (4,488 | ) | ||||||||
Other liabilities | 2,539 |
| 9,167 | |||||||||
Net cash provided (used) by operating activities | 19,427 | 13,316 | ||||||||||
INVESTING ACTIVITIES: | ||||||||||||
Purchases of securities | (160,679 | ) | (358,312 | ) | ||||||||
Principal repayments and maturities of securities | 164,551 | 232,046 | ||||||||||
Proceeds from sales of securities | 34,671 | 10,089 | ||||||||||
Origination of loans, net of principal repayments | (357,484 | ) | (366,876 | ) | ||||||||
Purchases of loans and participating interest in loans | (6,131 | ) | (24,321 | ) | ||||||||
Proceeds from sales of loans and participating interest in loans | 172,192 | 295,207 | ||||||||||
Purchases of property and equipment-net | (11,761 | ) | (1,154 | ) | ||||||||
Proceeds from sale of real estate held for sale-net | 1,231 | 2,979 | ||||||||||
Investment in bank-owned life insurance | -- | -- | ||||||||||
Other | (56 | ) | (90 | ) | ||||||||
Net cash (used) by investing activities | (163,466 | ) | (237,432 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||
Increase in deposits | 161,653 | 195,086 | ||||||||||
Proceeds from FHLB advances | 596,800 | 226,751 | ||||||||||
Repayment of FHLB advances | (654,294 | ) | (184,542 | ) | ||||||||
Proceeds from issuance of junior subordinated debentures | 15,000 | -- | ||||||||||
Proceeds from issuance of repurchase agreement borrowings | -- | 19,000 | ||||||||||
Repayment of repurchase agreement borrowings | (11,200 | ) | (19,587 | ) | ||||||||
Increase (decrease) in other borrowings, net | 14,295 | (1,399 | ) | |||||||||
Cash dividends paid | (3,679 | ) | (3,388 | ) | ||||||||
Repurchases of stock, net of forfeitures | (552 | ) | -- | |||||||||
ESOP shares earned | (94 | ) | (5 | ) | ||||||||
Exercise of stock options | 2,511 | 437 | ||||||||||
Net cash provided by financing activities | 120,440 | 235,151 | ||||||||||
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS | (23,599 | ) | 11,035 | |||||||||
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD | 77,298 | 132,910 | ||||||||||
CASH AND DUE FROM BANKS, END OF PERIOD | $ | 53,699 | $ | 143,945 |
(Continued on next page)
7
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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Six Months Ended June 30, 2004 and 2003
(Continued from prior page)
2004 | 2003 | |||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
Interest paid in cash | $ | 28,361 | $ | 30,473 | ||||||||
Taxes paid in cash | 2,250 | -- | ||||||||||
Non-cash investing and financing transactions: | ||||||||||||
Loans, net of discounts, specific loss allowances and unearned income, transferred | 1,604 | 6,224 | ||||||||||
Net change in accrued dividends payable | 24 | 9 | ||||||||||
Change in other assets/liabilities | 475 | -- | ||||||||||
Investments available for sale reclassified as held to maturity | 15,334 | -- |
See notes to consolidated financial statements
8
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BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation and Critical Accounting Policies
Banner Corporation (BANR or the Company) is a bank holding company incorporated in the State of Washington. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiary, Banner Bank (BB or the Bank). The Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington, and its 46 branch offices and 12 loan production offices located in 23 counties in Washington, Oregon and Idaho. The Company is subject to regulation by the Federal Reserve Board (FRB). The Bank is subject to regulation by the State of Washington Department of Financial Institutions Division of Banks and the Federal Deposit Insurance Corporation (FDIC).
In the opinion of management, the accompanying consolidated statements of financial condition and related interim consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows reflect all adjustments (which include reclassifications and normal recurring adjustments) that are necessary for a fair presentation in conformity with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates and may have a material impact on the financial statements.
Various elements of the Company's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's financial statements. These policies relate to the methodology for the determination of the provision and allowance for loan and lease losses and the valuation of goodwill, mortgage servicing rights and real estate held for sale. These policies and the judgments, estimates and assumptions are described in greater detail in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 of the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition.
Stock Compensation Plans: The Company measures its employee stock-based compensation arrangements under the provisions outlined in Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized for its stock option plans. If the compensation cost for the Company's compensation plans had been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, the Company's net income available to common stockholders on a diluted basis and diluted earnings per common share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
Quarters Ended | Six Months Ended | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
Net income available to common stockholders: | ||||||||||||
Basic: | ||||||||||||
As reported | $ | 4,548 | $ | 4,121 | $ | 8,911 | $ | 7,550 | ||||
Pro forma | 4,344 | 3,885 | 8,469 | 7.002 | ||||||||
Diluted: | ||||||||||||
As reported | $ | 4,548 | $ | 4,121 | $ | 8,911 | $ | 7,550 | ||||
Pro forma | 4,344 | 3,885 | 8,469 | 7,002 | ||||||||
Net income per common share: | ||||||||||||
Basic: | ||||||||||||
As reported | $ | 0.41 | $ | 0.38 | $ | 0.80 | $ | 0.70 | ||||
Pro forma | 0.39 | 0.36 | 0.76 | 0.65 | ||||||||
Diluted: | ||||||||||||
As reported | $ | 0.39 | $ | 0.37 | $ | 0.76 | $ | 0.68 | ||||
Pro forma | 0.37 | 0.35 | 0.72 | 0.63 |
The compensation expense included in the pro forma net income available to common stockholders on a diluted basis and diluted earnings per common share are not likely to be representative of the effect on reported net income for future years because options vest over several years and additional awards generally are made each year.
9
<PAGE>
The fair value of options granted under the Company's stock option plans (SOPs) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants:
2004 | 2003 | ||||
Annual dividend yield | 2.21 to 2.44 | % | 3.42 to 3.76 | % | |
Expected volatility | 31.7 to 34.2 | % | 36.0 to 49.6 | % | |
Risk free interest rate | 2.72 to 4.78 | % | 2.94 to 4.07 | % | |
Expected lives | 5 to 9 | yrs | 5 to 9 | yrs |
Certain reclassifications have been made to the 2003 financial statements and/or schedules to conform to the 2004 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of such reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.
The information included in this Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.
Note 2: Recent Developments and Significant Events
In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 46,Consolidation of Certain Variable Interest Entities-An Interpretation of ARB No. 51, to clarify when an entity should consolidate another entity known as a variable interest entity (VIE), more commonly referred to as a special purpose entity or SPE. A VIE is an entity in which equity investors do not have characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties, and may include many types of SPEs. FIN 46 requires that an entity shall consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the VIE's expected losses if they occur, receive a majority of the VIE's expected residual returns if they occur, or both. FIN 46 was effective for newly created VIEs beginning February 1, 2003 and for e xisting VIEs as of the third quarter of 2003. Effective October 10, 2003, FASB deferred the effective date of FIN 46 from July 1, 2003, to the first interim period ending after December 15, 2003 (June 30, 2004) for VIEs originated prior to February 1, 2003. The Company elected to adopt FIN 46 early, which resulted in the deconsolidation of the special purpose business trusts effective December 31, 2003. This increased the Bank's held-to-maturity investments and related borrowings by $1.7 million as detailed below.
Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities:At December 31, 2003, three wholly-owned subsidiary grantor trusts, Banner Capital Trust I, II, and III (collectively, Trusts), established by the Company had issued $55 million of pooled trust preferred securities. In addition, as noted below, in March 2004 the Company established a fourth wholly-owned subsidiary grantor trust called Banner Capital Trust IV to facilitate the issuance of an additional $15 million of trust preferred securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures. The Trusts used the net proceeds from the offerings to purchase a like amount of junior subordinated debentures (Debentures) of the Company. The Debentures are the sole assets of the Trusts. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.
Prior to adoption of FIN 46, the Trusts were considered consolidated subsidiaries of the Company. At December 31, 2002, $40 million of trust preferred securities were included in the Company's consolidated balance sheet in the liabilities section, under the caption, "Trust preferred securities," and the $1.2 million common capital securities of the issuer retained by the Company were eliminated against the Company's investment in the Trusts. Distributions on these trust preferred securities were recorded as interest expense on the consolidated statements of income.
As a result of the adoption of FIN 46, the Company deconsolidated all three Trusts as of December 31, 2003. As a result, the Debentures issued by the Company to the Trusts, totaling $56.7 million, were reflected in the Company's consolidated balance sheet in the liabilities section at December 31, 2003 under the caption, "Junior subordinated debentures." Beginning January 1, 2004, the Company has recorded interest expense for the corresponding junior subordinated debentures in its consolidated statements of income. The Company recorded $1.7 million of the common capital securities issued by the Trusts in the securities held-to-maturity in its consolidated balance sheet at December 31, 2003.
Sale of $15 Million of Trust Preferred Securities:In March 2004, the Company completed the issuance of an additional $15.5 million of Debentures in connection with a private placement of pooled trust preferred securities called Banner Capital Trust IV. The trust preferred securities were issued by a special purpose business trust owned by the Company and sold to pooled investment vehicles sponsored and marketed by investment banking firms. The Debentures have been recorded as a liability on the statement of financial condition but, subject to limitations under current Federal Reserve guidelines, qualify as Tier 1 capital for regulatory capital purposes. The proceeds from this offering are expected to be used primarily to fund growth, including acquisitions, by augmenting the Bank's regulatory capital. Under the terms of the transaction, the trust preferred securities and Debentures have a maturity of 30 years and are redeemable after five years with certain excepti ons. The holders of the trust preferred securities and Debentures are entitled to receive cumulative cash distributions at a variable annual rate. The interest rate is reset quarterly to equal three-month LIBOR plus 2.85%.
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Note 3: Business Segments
The Company is managed by legal entity and not by lines of business. The Bank is a community oriented commercial bank chartered in the State of Washington. The Bank's primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its primary market area. The Bank offers a wide variety of deposit products to its consumer and commercial customers. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. The Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis. In addition to interest income on loans and investment securities, the Bank receives other income from deposit service charges, loan servicing fees and from the sale of loans and investments. The performance of the Bank is reviewed by the Company's executive management and Board of Directors on a monthly basis. All of the executive officers of the Company are members of the Bank's management team.
Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders. The Company has determined that its current business and operations consist of a single business segment.
Note 4: Additional Information Regarding Interest-Bearing Deposits and Securities
Encumbered Securities: Securities labeled "Encumbered" are pledged securities that are subject to certain agreements which may allow the secured party to either sell and replace them with similar but not the exact same security or otherwise pledge the securities. In accordance with SFAS No. 140, the amounts have been separately identified in the Consolidated Statements of Financial Condition as "Encumbered."
The following table sets forth additional detail on the Company's interest-bearing deposits and securities at the dates indicated (at carrying value) (in thousands):
June 30 | December 31 | June 30 | |||||||
2004 | 2003 | 2003 | |||||||
Interest-bearing deposits included in cash and due from banks | $ | 7,053 | $ | 2,644 | $ | 71,337 | |||
Mortgage-backed securities | 382,408 | 415,161 | 334,660 | ||||||
Other securities-taxable | 220,445 | 243,088 | 211,053 | ||||||
Other securities-tax exempt | 42,648 | 38,478 | 25,869 | ||||||
Equity securities with dividends | 5,758 | 5,447 | 3,578 | ||||||
Total securities | 651,259 | 702,174 | 575,160 | ||||||
Federal Home Loan Bank (FHLB) stock | 35,387 | 34,693 | 33,814 | ||||||
$ | 693,699 | $ | 739,511 | $ | 680,311 |
The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands):
Quarters Ended | Six Months Ended | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
Mortgage-backed securities interest | $ | 4,394 | $ | 3,183 | $ | 8,921 | $ | 6,235 | ||||
Taxable interest and dividends | 2,335 | 2,140 | 4,650 | 4,109 | ||||||||
Tax-exempt interest | 456 | 256 | 877 | 563 | ||||||||
FHLB stock dividends | 349 | 437 | 694 | 983 | ||||||||
3,140 | 2,833 | 6,221 | 5,655 | |||||||||
$ | 7,534 | $ | 6,016 | $ | 15,142 | $ | 11,890 |
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Note 5: Calculation of Weighted Average Shares Outstanding for Earnings Per Share (EPS)
The following table reconciles total shares originally issued to weighted shares outstanding used to calculate earnings per share data (in thousands):
Quarters Ended | Six Months Ended | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
Total shares originally issued | 13,201 | 13,201 | 13,201 | 13,201 | ||||||||
Less retired weighted average shares plus | (1,621 | ) | (1,879 | ) | (1,666 | ) | (1,889 | ) | ||||
Less unallocated shares held by the ESOP | (439 | ) | (516 | ) | (439 | ) | (516 | ) | ||||
Basic weighted average shares outstanding | 11,141 | 10,806 | 11,096 | 10,796 | ||||||||
Plus unvested MRP and stock option incremental | 579 | 324 | 590 | 290 | ||||||||
Diluted weighted average shares outstanding | 11,720 | 11,130 | 11,686 | 11,086 |
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ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis (MD&A) and other portions of this report contain certain "forward-looking statements" concerning the future operations of the Company. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward-looking statements" contained in this report and our Annual Report on Form 10-K. We have used "forward-looking statements" to describe future plans and strategies, including our expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could cause actual results to differ materially include, but are not limited to, regional and general economic conditions, management's ability to gen erate continued improvement in asset quality and profitability, competition, changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values, agricultural commodity prices, crop yields and weather conditions, loan delinquency rates, changes in accounting principles, practices, policies or guidelines, changes in legislation or regulation, other economic, competitive, governmental, regulatory and technological factors affecting operations, pricing, products and services and the Company's ability to successfully resolve the outstanding credit issues. Accordingly, these factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. The Company undertakes no responsibility to update or revise any "forward-looking statements."
General
Banner Corporation, a Washington corporation, is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiary, Banner Bank. The Bank is a Washington-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (FDIC). The Bank is a regional bank which offers a wide variety of commercial banking services and financial products to both businesses and individuals in its primary market areas. The Bank conducts business from its main office in Walla Walla, Washington, and its 46 branch offices and 12 loan production offices located in 23 counties in Washington, Oregon and Idaho.
The operating results of the Company depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits and Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a function of the Company's interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-bearing liabilities. As more fully explained below, the Company's net interest income increased $3.3 million for the quarter ended June 30, 2004, compared to the same period a year earlier, as a result of an increase of 7 basis points in the interest rate spread and significant growth in interest-bearing assets and liabilities.
The Company's net income also is affected by provisions for loan losses and the level of its other income, including deposit service charges, loan origination and servicing fees, and gains and losses on the sale of loans and securities, as well as its non-interest operating expenses and income tax provisions. Provision for loan losses decreased by $800,000 to $1.5 million for the quarter ended June 30, 2004, compared to $2.3 million for the quarter ended June 30, 2003. Other operating income decreased by $1.3 million for the quarter ended June 30, 2004, largely as a result of decreased mortgage banking activity and the resulting gain on the sale of loans. Other operating expenses increased $2.3 million for the quarter ended June 30, 2004, compared to the same period ended June 30, 2003, reflecting the continued growth of the Company as detailed below in the "Comparison of Financial Condition at June 30, 2004 and December 31, 2003" and "Comparison of Results of Operations for the Quarters and Six Months ended June 30, 2004 and 2003" sections of this report.
Management's discussion and analysis of results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to Consolidated Financial Statements.
Comparison of Financial Condition at June 30, 2004 and December 31, 2003
General: Total assets increased $124.8 million, or 4.7%, from $2.635 billion at December 31, 2003, to $2.760 billion at June 30, 2004. The increase largely resulted from growth in the loan portfolio and was funded primarily by deposit growth. Net loans receivable (gross loans less loans in process, deferred fees and discounts, and allowance for loan losses) increased $180.5 million, or 10.6%, from $1.701 billion at December 31, 2003, to $1.881 billion at June 30, 2004. Loan portfolio growth was broad-based and included an increase of $50.4 million in mortgages secured by commercial real estate loans, an increase of $15.9 million in multifamily real estate loans, an increase of $34.7 million in construction and land loans and an increase of $60.8 million in non-mortgage commercial and agricultural loans. These increases reflect the Company's continuing effort to increase the portion of its loans invested in commercial, construction and land development real estate loans, and non- mortgage commercial business and agricultural loans. While these loans are inherently of higher risk than residential mortgages, management believes that over an extended period of time they can produce higher credit-adjusted returns to the Company and provide better opportunities to develop comprehensive banking relationships with borrowers than most residential mortgages. The Company also had an increase of $20.4 million in one- to four-family residential real estate loans, while other consumer loans were nearly unchanged. Securities available for sale and held to maturity decreased $50.9 million, or 7.3%, from $702.2 million at December 31, 2003, to $651.3 million at June 30, 2004, primarily as a result of maturities and principal repayments on mortgage related securities, although the decrease also reflected declines in the fair value of the portion of the portfolio designated as available for sale as a result of changes in the level of market interest rates. As noted in the Consolidated Statements o f Comprehensive Income, higher market interest rates resulted in an unrealized holding loss of $11.7 million for the Company's available for sale securities at June 30, 2004, compared to an unrealized loss of $224,000 at December 31, 2003. This change in the unrealized
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loss was also primarily responsible for the increase in deferred income tax asset, which increased by $5.1 million, as well as for the $7.6 million decrease in accumulated other comprehensive income (loss) included in the stockholders' equity section of the Consolidated Statements of Financial Condition. FHLB stock increased $694,000 as a result of dividends paid by the FHLB in the form of additional shares of stock. The Company also had an increase of $860,000 in bank-owned life insurance from the growth of cash surrender values on existing policies. Property and equipment increased by $10.0 million to $32.8 million at June 30, 2004, from $22.8 million at December 31, 2003. During the most recent quarter, the Bank purchased three branch properties and a piece of undeveloped land from a major bank that recently completed an acquisition of another competing bank. This facilities purchase is part of an ambitious strategy to grow deposits by expanding retail distribution in important mark ets in Washington, Oregon and Idaho. The properties purchased, located in Edmonds, Kent, Everett and Bellingham, Washington, are all part of the Puget Sound region, the most highly populated area in the Pacific Northwest with the most significant business activity. Earlier in the year the Bank opened new offices in Hillsboro, Oregon, Walla Walla, Washington and Boise and Twin Falls, Idaho. The increase in property and equipment also reflects construction in progress for a new operations facility in Walla Walla and a major rebuild of a branch office in Yakima, Washington. The majority of the increase in assets was funded by a growth in deposits. Additional funding was also provided by the issuance of junior subordinated debentures and net income from operations. Deposits grew $161.7 million, or 9.7%, from $1.671 billion at December 31, 2003, to $1.833 billion at June 30, 2004. Non-interest-bearing deposits only increased $4.0 million, or 2.0%, while interest-bearing deposits increased significantly, gr owing by $157.6 million, or 10.8%, from the December 31, 2003 amounts. While FHLB advances decreased $57.5 million from $612.6 million at December 31, 2003, to $555.1 million at June 30, 2004, junior subordinated debentures issued in connection with trust preferred securities increased $15.5 million to $72.2 million and other borrowings increased $3.1 million to $72.5 million at June 30, 2004.
Comparison of Results of Operations for the Quarters and Six Months Ended June 30, 2004 and 2003
General. For the quarter ended June 30, 2004, the Company had net income of $4.5 million, or $.39 per share (diluted), compared to net income of $4.1 million, or $.37 per share (diluted), for the quarter ended June 30, 2003, an increase of $427,000. The Company's improved operating results reflect significant growth of assets and liabilities, combined with a modest increase in the net interest margin and a substantially lower provision for loan losses. The Company's operating results also reflect a significant decrease in other operating income, primarily mortgage banking revenues, combined with substantial increases in other operating expenses, particularly compensation, occupancy and advertising. Compared to levels a year ago, total assets increased 9.8%, to $2.760 billion at June 30, 2004, net loans increased 14.9%, to $1.881 billion, deposits grew 8.3%, to $1.833 billion, and borrowings, including junior subordinated debentures, increased 18.6%, to $699.8 million. Average inte rest earning assets were $2.580 billion for the quarter ended June 30, 2004, an increase of $324.9 million, or 14.4%, compared to the same period a year earlier. Average equity was 7.59% of average assets for the quarter ended June 30, 2004, compared to 8.09% of average assets for the quarter ended June 30, 2003, reflecting increased balance sheet leverage.
Net Interest Income. Net interest income before provision for loan losses increased to $23.4 million for the quarter ended June 30, 2004, compared to $20.1 million for the quarter ended June 30, 2003, largely as a result of the growth in average interest-earning assets noted above. In addition, the net interest margin increased 8 basis points for the quarter from the prior year quarter, reflecting a similar 7 basis point increase in net interest rate spread and a slight increase in the ratio of interest-bearing assets relative to interest-earning liabilities. For the six-month period ended June 30, 2004, the net interest margin increased 5 basis points from the same period in 2003, reflecting a 6 basis point increase in net interest rate spread. While net interest income also increased compared to the quarter ended March 31, 2004, the net interest margin decreased by 5 basis points compared to the previous quarter as the long-term trend of declining funding cost appears to have ended, reflecting recent changes in interest rate markets. Management expects that the net interest margin will likely continue to experience some additional compression near term.
Interest Income. Interest income for the quarter ended June 30, 2004 was $37.8 million, compared to $35.4 million for the quarter ended June 30, 2003, an increase of $2.4 million, or 6.8%. The increase in interest income occurred despite a 40 basis point decrease in the average yield on interest-earning assets, reflecting significant growth in those assets. The yield on average interest-earning assets decreased to 5.90% for the quarter ended June 30, 2004, compared to 6.30% for the same period a year earlier. Average loans receivable for the quarter ended June 30, 2004 increased by $225.2 million, or 13.8%, when compared to the quarter ended June 30, 2003. Interest income on loans for the quarter increased by $902,000, or 3.1%, compared to the prior year, as the impact of the increase in average loan balances was substantially reduced by a 66 basis point decrease in the average yield. The decrease in average loan yield reflects the decline in the level of market interest rates com pared to prior year levels, particularly the prime rate which affects a large portion of construction, commercial and agricultural loans, and declines which occurred during the prior year which led to a significant amount of prepayments of higher-rate real estate and other fixed-rate, fixed-term loans. The loan mix continued to change during the quarter as the portion of the portfolio invested in construction, land development and commercial loans increased compared to the prior year. Loans yielded 6.56% for the quarter ended June 30, 2004, compared to 7.22% for the quarter ended June 30, 2003. While the level of market interest rates was lower than a year earlier, loan yields were supported to a degree by certain loans with rate floors and by changes in the portfolio mix. The combined average balance of mortgage-backed securities, investment securities, daily interest-bearing deposits and FHLB stock increased by $99.6 million for the quarter ended June 30, 2004, and the interest and dividend income from those investments increased $1.5 million compared to the quarter ended June 30, 2003. The average yield on mortgage-backed securities increased to 4.25% for the quarter ended June 30, 2004, from 3.71% for the comparable period in 2003, reflecting reduced amortization of purchase premiums on certain portions of the portfolio as well as a reduction in the adverse effects of delayed receipt of principal payments on mortgage-backed securities as a result of slower prepayments. Both premium amortization and principal prepayments were significantly elevated in the year earlier period. The average yield on other investment securities and cash equivalents increased to 4.14% for the quarter ended June 30, 2004, from 3.92% for the comparable quarter in 2003, reflecting slightly higher market rates. Earnings on FHLB stock decreased by $88,000, to $349,000, in the quarter ended June 30, 2004, from $437,000 in the comparable quarter in 2003, despite a $1.7 million increase in the average balance held, as a result of a 124 basis point decrease in the yield received. The dividend yield on FHLB stock
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was 4.01% for the quarter ended June 30, 2004, compared to 5.25% for the quarter ended June 30, 2003. Dividends on FHLB stock are established on a quarterly basis by vote of the Directors of the FHLB.
Interest income for the six months ended June 30, 2004 increased by $4.3 million, or 6.2%, to $74.5 million from $70.1 million for the comparable period in 2003. Interest income from loans increased $1.1 million, or 1.8% from the comparable period in 2003. The increase in loan interest income reflects the impact of a $196.9 million of growth in the average balance of loans receivable offset to a degree by a 69 basis point decrease in the yield on the loan balances. Interest income from mortgage-backed and investment securities and FHLB stock for the six months ended June 30, 2004 increased $3.3 million, from $11.9 million in 2003 to $15.1 million in the current period, reflecting a substantial $125.0 million increase in average balances and a 20 basis point increase in yield.
Interest Expense. Interest expense for the quarter ended June 30, 2004 was $14.4 million, compared to $15.3 million for the comparable period in 2003, a decrease of $915,000, or 6.0%. The decrease in interest expense was the result of a significant decrease in the average cost of all interest-bearing liabilities to 2.32% from 2.79%, primarily reflecting the lower levels of market interest rates and the maturity of certain higher-costing certificates of deposit and fixed-rate borrowings. Deposit interest expense decreased $447,000 for the quarter ended June 30, 2004 compared to the same quarter a year ago, despite the strong deposit growth throughout the Company over the past twelve months, as a result of a continuing decline in the cost of deposits. Average deposit balances increased $178.0 million, or 11.1%, to $1.777 billion for the quarter ended June 30, 2004, from $1.599 billion for the quarter ended June 30, 2003, while, at the same time, the average rate paid on deposit ba lances decreased 32 basis points. Average FHLB advances totaled $581.1 million during the quarter ended June 30, 2004, compared to $522.5 million during the quarter ended June 30, 2003, an increase of $58.6 million that, combined with a 98 basis point decrease in the average cost of advances, resulted in a $785,000 decrease in related interest expense. The average rate paid on those advances decreased to 3.43% for the quarter ended June 30, 2004, from 4.41% for the quarter ended June 30, 2003. FHLB advances are generally fixed-rate, fixed-term borrowings with rates on many of those advances established in periods when market rates were considerably higher. In addition to reflecting the maturity and repricing of certain of those fixed-rate, fixed-term advances, the lower cost in the current quarter reflects growth using new advances priced at current market rates. Funding was also provided in the first quarter of 2004 by junior subordinated debentures which were issued in connection with trust preferred securities and had an average balance of $72.2 million and an average cost of 4.70% (including amortization of prepaid underwriting costs) for the quarter ended June 30, 2004. Trust preferred securities outstanding in the first quarter of the prior year had an average balance of $40.0 million and an average rate of 5.48%. (See Note 2, Recent Developments and Significant Events, for a detailed discussion of the accounting for junior subordinated debentures and trust preferred securities.) Other borrowings consist of retail repurchase agreements with customers and reverse repurchase agreements with investment banking firms secured by certain investment securities. The average balance for other borrowings increased $26.8 million, to $71.8 million for the quarter ended June 30, 2004, from $44.9 million for the same period in 2003, while the related interest expense increased $20,000, to $223,000, from $203,000 for the respective periods. The average rate paid on other borrowings was 1.25% in the quarter end ed June 30, 2004, compared to 1.81% for the same quarter in 2003. The Company's other borrowings generally have relatively short terms and therefore reprice to current market levels more quickly than FHLB advances, which generally lag current market rates.
A comparison of total interest expense for the six months ended June 30, 2004 shows a decrease of $2.3 million, or 7.5%, from the comparable period in June 2003. The interest expense reflects an increase in average deposits of $170.8 million combined with a $130.9 million increase in FHLB advances, trust preferred securities and other borrowings. The effect on interest expense of the $301.7 million increase in average interest-bearing liabilities was offset by a 55 basis point decrease in the interest paid on those liabilities.
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The following tables provide additional comparative data on the Company's operating performance:
Quarters Ended | Six Months Ended | ||||||||||||
June 30 | June 30 | ||||||||||||
Average Balances | |||||||||||||
(in thousands) | 2004 | 2003 | 2004 | 2003 | |||||||||
Investment securities and cash equivalents | $ | 271,284 | $ | 245,073 | $ | 270,611 | $ | 229,748 | |||||
Mortgage-backed obligations | 415,452 | 343,686 | 413,431 | 331,068 | |||||||||
Loans receivable | 1,858,449 | 1,633,218 | 1,804,723 | 1,607,865 | |||||||||
FHLB stock | 35,042 | 33,382 | 34,870 | 33,111 | |||||||||
Total average interest-earning assets | 2,580,227 | 2,255,359 | 2,523,635 | 2,201,792 | |||||||||
Non-interest-earning assets | 149,293 | 160,455 | 156,365 | 158,950 | |||||||||
Total average assets | $ | 2,729,520 | $ | 2,415,814 | $ | 2,680,000 | $ | 2,360,742 | |||||
Deposits | $ | 1,776,837 | $ | 1,598,829 | $ | 1,723,673 | 1,552,883 | ||||||
Advances from FHLB | 581,118 | 522,549 | 592,467 | 513,699 | |||||||||
Junior subordinated debentures/Trust preferred | 72,168 | 40,000 | 65,030 | 40,000 | |||||||||
Other borrowings | 71,761 | 44,934 | 71,421 | 44,354 | |||||||||
Total average interest-bearing liabilities | 2,501,884 | 2,206,312 | 2,452,591 | 2,150,936 | |||||||||
Non-interest-bearing liabilities | 20,468 | 13,980 | 19,968 | 15,548 | |||||||||
Total average liabilities | 2,522,352 | 2,220,292 | 2,472,559 | 2,166,484 | |||||||||
Equity | 207,168 | 195,522 | 207,441 | 194,258 | |||||||||
Total average liabilities and equity | $ | 2,729,520 | $ | 2,415,814 | $ | 2,680,000 | $ | 2,360,742 | |||||
Interest Rate Yield/Expense (rates are annualized) | |||||||||||||
Interest Rate Yield: | |||||||||||||
Investment securities and cash equivalents | 4.14 | % | 3.92 | % | 4.11 | % | 4.10 | % | |||||
Mortgage-backed obligations | 4.25 | % | 3.71 | % | 4.34 | % | 3.80 | % | |||||
Loans receivable | 6.56 | % | 7.22 | % | 6.61 | % | 7.30 | % | |||||
FHLB stock | 4.01 | % | 5.25 | % | 4.00 | % | 5.99 | % | |||||
Total interest rate yield on interest-earning assets | 5.90 | % | 6.30 | % | 5.93 | % | 6.42 | % | |||||
Interest Rate Expense: | |||||||||||||
Deposits | 1.90 | % | 2.22 | % | 1.90 | % | 2.30 | % | |||||
Advances from FHLB | 3.43 | % | 4.41 | % | 3.42 | % | 4.49 | % | |||||
Junior subordinated debentures/Trust preferred | 4.70 | % | 5.48 | % | 4.75 | % | 5.61 | % | |||||
Other borrowings | 1.25 | % | 1.81 | % | 1.30 | % | 1.70 | % | |||||
Total interest rate expense on | 2.32 | % | 2.79 | % | 2.32 | % | 2.87 | % | |||||
Interest spread | 3.58 | % | 3.51 | % | 3.61 | % | 3.55 | % | |||||
Net interest margin on interest earning assets | 3.65 | % | 3.57 | % | 3.67 | % | 3.62 | % | |||||
Additional Key Financial Ratios (ratios are annualized) | |||||||||||||
Return on average assets | 0.67 | % | 0.68 | % | 0.67 | % | 0.64 | % | |||||
Return on average equity | 8.83 | % | 8.45 | % | 8.64 | % | 7.84 | % | |||||
Average equity / average assets | 7.59 | % | 8.09 | % | 7.74 | % | 8.23 | % | |||||
Average interest-earning assets / interest-bearing | 103.13 | % | 102.22 | % | 102.9 | % | 102.36 | % | |||||
Non-interest (other operating) expenses / average | 2.88 | % | 2.87 | % | 2.88 | % | 2.93 | % | |||||
Efficiency ratio | 70.98 | % | 67.88 | % | 70.98 | % | 69.11 | % |
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Provision and Allowance for Loan Losses. During the quarter ended June 30, 2004, the provision for loan losses was $1.5 million, compared to $2.3 million for the quarter ended June 30, 2003, a decrease of $800,000. As noted in Note 1 to the Consolidated Financial Statements, the provision and allowance for loan losses is one of the most critical accounting estimates included in the Company's financial statements. The decrease in the provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon management's evaluation of the adequacy of general and specific loss reserves as more fully explained below.
The significantly lower provision in the current quarter reflects lower levels of non-performing loans and net charge-offs, improvement in the current economic environment and strengthening in the prospects for collection on previously identified non-performing loans, as well as the recognition of problem loans through provision for losses recorded in previous periods. Non-performing loans decreased $2.8 million to $25.3 million at June 30, 2004, compared to $28.1 million at June 30, 2003, and decreased $3.1 million compared to $28.4 million at December 31, 2003. Net charge-offs were $298,000 for the current quarter, compared to $1.7 million for the same quarter a year earlier. In recent years, non-performing loans have been primarily concentrated in the Puget Sound region where continued economic weakness has diminished certain borrowers' ability to meet obligations. However, during the past year, the Bank had a significant increase in non-performing agricultural loans and agricultura l-related business loans due from borrowers located in northeastern Oregon. Generally, these problem loans reflect unique operating difficulties for the individual borrower rather than a weakness in the overall economy of the area. A comparison of the allowance for loan losses at June 30, 2004 and 2003 shows an increase of $2.0 million, to $28.0 million at June 30, 2004, from $26.1 million at June 30, 2003. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) was 1.47% and 1.57% at June 30, 2004 and June 30, 2003, respectively.
In originating loans, the Company recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the credit worthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. As a result, the Company maintains an allowance for loan losses consistent with the GAAP guidelines outlined in SFAS No. 5,Accounting for Contingencies. The Company has established systematic methodologies for the determination of the adequacy of its allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans. The Company increases its allowance for loan losses by charging provisions for probable loan losses against the Company's income and values impaired loans consistent with t he guidelines in SFAS No. 114,Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure.
The allowance for losses on loans is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited to the allowance. The reserve is based upon factors and trends identified by management at the time financial statements are p repared. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. These agencies may require changes to the allowance based upon judgments different from those of management. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control. The adequacy of general and specific reserves is based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience and current economic conditions, as well as individual review of certain large balance loans. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment include residential real estate and c onsumer loans. Smaller balance non-homogeneous loans also may be evaluated collectively for impairment. Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment. Loans are considered impaired when, based on current information and events, management determines that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, value of the underlying collateral and current status of the economy. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired lo ans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. As of June 30, 2004, the Company had identified $24.1 million of impaired loans as defined by SFAS No. 114 and had established $5.0 million of specific loss allowances for these loans.
The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of general reserves is based on analysis of potential exposures existing in the Bank's loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by management at the time the financial statements are prepared. The formula allowance is calculated by applying loss factors to outstanding loans, excluding loans with specific allowances. Loss factors are based on the Company's historical loss experience adjusted for significant factors including the experience of other banking organizations that, in management's jud gment, affect the collectibility of the portfolio as of the evaluation date. The unallocated allowance is based upon management's evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This methodology may result in losses or recoveries differing significantly from those provided in the financial statements.
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The following tables are provided to disclose additional detail on the Company's loans and allowance for loan losses (in thousands):
June 30 | December 31 | June 30 | |||||||||||||
Loan Portfolio: | 2004 | 2003 | 2003 | ||||||||||||
Loans (including loans held for sale): | |||||||||||||||
Secured by real estate: | |||||||||||||||
One- to four-family | $ | 287,990 | $ | 275,197 | $ | 299,524 | |||||||||
Consumer secured by one- to four-family | 38,918 | 31,277 | 28,875 | ||||||||||||
Total one- to four-family | 326,908 | 306,474 | 325,399 | ||||||||||||
Commercial | 506,411 | 455,964 | 407,419 | ||||||||||||
Multifamily | 104,936 | 89,072 | 76,598 | ||||||||||||
Construction and land | 433,611 | 398,954 | 376,385 | ||||||||||||
Commercial business | 340,493 | 321,671 | 328,130 | ||||||||||||
Agricultural business, including secured by farmland | 160,920 | 118,903 | 113,445 | ||||||||||||
Consumer | 36,140 | 35,887 | 36,740 | ||||||||||||
Total loans outstanding | 1,909,419 | 1,726,925 | 1,664,116 | ||||||||||||
Less allowance for loan losses | 28,037 | 26,060 | 26,075 | ||||||||||||
Total net loans outstanding at end of period | $ | 1,881,382 | $ | 1,700,865 | $ | 1,638,041 | |||||||||
Quarters Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
Allowance for Loan Losses: | 2004 | 2003 | 2004 | 2003 | |||||||||||
Balance, beginning of the period | $ | 26,885 | $ | 25,551 | $ | 26,060 | $ | 26,539 | |||||||
Provision for loan losses | 1,450 | 2,250 | 2,900 | 4,500 | |||||||||||
Recoveries of loans previously charged off: | |||||||||||||||
Secured by real estate: | |||||||||||||||
One- to four-family | -- | -- | -- | -- | |||||||||||
Commercial | 115 | -- | 115 | -- | |||||||||||
Multifamily | -- | -- | -- | -- | |||||||||||
Construction and land | -- | -- | -- | -- | |||||||||||
Commercial business | 158 | 218 | 297 | 313 | |||||||||||
Agricultural business, including secured by farmland | -- | 11 | 3 | 12 | |||||||||||
Consumer | 12 | 15 | 21 | 29 | |||||||||||
285 | 244 | 436 | 354 | ||||||||||||
Loans charged off: | |||||||||||||||
Secured by real estate: | |||||||||||||||
One- to four-family | (12 | ) | (12 | ) | (36 | ) | (12 | ) | |||||||
Commercial | (81 | ) | (690 | ) | (326 | ) | (1,878 | ) | |||||||
Multifamily | -- | -- | -- | -- | |||||||||||
Construction and land | -- | (500 | ) | (100 | ) | (529 | ) | ||||||||
Commercial business | (398 | ) | (703 | ) | (737 | ) | (2,641 | ) | |||||||
Agricultural business, including secured by farmland | -- | -- | -- | -- | |||||||||||
Consumer | (92 | ) | (65 | ) | (160 | ) | (258 | ) | |||||||
(583 | ) | (1,970 | ) | (1,359 | ) | (5,318 | ) | ||||||||
Net charge-offs | (298 | ) | (1,726 | ) | (923 | ) | (4,964 | ) | |||||||
Balance, end of the period | $ | 28,037 | $ | 26,075 | $ | 28,037 | $ | 26,075 | |||||||
Net charge-offs as a percentage of average net book | 0.02 | % | 0.11 | % | 0.05 | % | 0.31 | % |
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The following is a schedule of the Company's allocation of the allowance for loan losses:
June 30 | December 31 | June 30 | |||||||
2004 | 2003 | 2003 | |||||||
Specific or allocated loss allowances: | |||||||||
Secured by real estate: | |||||||||
One- to four-family | $ | 641 | $ | 749 | $ | 800 | |||
Commercial | 5,749 | 5,058 | 4,900 | ||||||
Multifamily | 525 | 445 | 413 | ||||||
Construction and land | 5,108 | 5,207 | 6,609 | ||||||
Commercial business | 8,486 | 8,161 | 8,237 | ||||||
Agricultural business, including secured by farmland | 3,839 | 3,194 | 2,528 | ||||||
Consumer | 482 | 482 | 494 | ||||||
Total allocated | 24,830 | 23,296 | 23,981 | ||||||
Estimated allowance for undisbursed commitments | 324 | 242 | 272 | ||||||
Unallocated | 2,883 | 2,522 | 1,822 | ||||||
Total allowance for loan losses | $ | 28,037 | $ | 26,060 | $ | 26,075 | |||
Allowance for loan losses as a percentage of total loans outstanding | |||||||||
(loans receivable excluding allowance for losses) | 1.47 | % | 1.51 | % | 1.57 | % |
Other Operating Income. Other operating income was $4.1 million for the quarter ended June 30, 2004, a decrease of $1.3 million from the quarter ended June 30, 2003. This primarily reflects a $1.8 million decrease in the gain on sale of loans for the current quarter as increased interest rates led to decreased mortgage banking activity. Loan sales for the quarter ended June 30, 2004 totaled $100.5 million, compared to $166.5 million for the quarter ended June 30, 2003. Gain on sale of loans for the Company included $170,000 of fees on $12.1 million of loans which were brokered and are not reflected in the volume of loans sold. Partially offsetting the decline in loan sale gains was improvement in loan servicing fees, which increased by $430,000 for the quarter ended June 30, 2004, compared to the second quarter a year earlier when the Company recorded a $300,000 impairment charge for the value of originated mortgage servicing rights as a result of accelerated prepayments. Oth er fee and service charge income increased by $218,000, to $2.1 million for the quarter ended June 30, 2004, compared to $1.8 million for the quarter ended June 30, 2003, primarily reflecting growth in customer transaction accounts, although increased fees also reflect changes in the Company's overdraft protection program that were implemented during the first quarter of 2003 and changes in certain pricing schedules initiated in the current year. Other miscellaneous income declined $176,000 compared to a year earlier, primarily as a result of a modest decline in the earnings on bank-owned life insurance policies. The decrease in miscellaneous income also reflects the Bank recording losses associated with Community Reinvestment Act (CRA) investments in certain limited partnerships which support low and moderate income housing projects. These losses are generally offset by tax credits associated with the projects which generate positive net returns on the investments over time.
Other operating income for the six months ended June 30, 2004 decreased $2.3 million from the comparable period in 2003. This includes a $2.6 million decrease in the gain on sale of loans, a $403,000 increase in other fee and service charge income and a $166,000 increase in loan servicing fees. Loan sales decreased from $295.2 million for the six months ended June 30, 2003, to $172.2 million for the six months ended June 30, 2004. Similar to the quarter just ended, miscellaneous income decreased by $297,000 for the six months ended June 30, 2004 primarily as a result of lower earnings on bank-owned life insurance and losses on CRA partnership investments.
Other Operating Expenses. Other operating expenses increased $2.3 million, to $19.5 million for the quarter ended June 30, 2004, from $17.3 million for the quarter ended June 30, 2003. Other operating expenses reflect the growth in assets and liabilities, customer relationships and complexity of operations as the Company continues to expand. The higher level of operating expenses in the current quarter includes significant increases in compensation for additional branch and commercial loan production staff hired to position the Company for future growth. In addition, compensation was higher as a result of general wage and salary increases, as well as increased costs associated with employee benefit programs and employer-paid taxes. These increases were mitigated to a degree by lower commission expenses related to mortgage banking operations. The Company also significantly increased its commitment to advertising and marketing expenditures, which were $540,000 greater in the qu arter ended June 30, 2004 than in the same period in the prior year. The increase in expenses includes operating costs associated with opening new branch offices in Seattle, Yakima and Walla Walla, Washington, Hillsboro, Oregon and Boise and Twin Falls, Idaho, new commercial lending centers in Seattle, Spokane and Federal Way, Washington and mortgage lending offices in Burlington and Moses Lake, Washington. The Company also had significant expenses for professional services in the current quarter, in part as a result of services related to compliance with certain provisions of the Sarbanes-Oxley Act of 2002, but primarily as a result of legal fees associated with loan collection efforts. Higher operating expenses, as well as a reduction in mortgage banking revenue, caused the Company's efficiency ratio to increase to 70.98% for the quarter ended June 30, 2004, from 67.88% for the comparable period ended June 30, 2003. On the other hand, other operating expenses as a percentage of average assets increased only very slightly to 2.88% for the quarter ended June 30, 2004, compared to 2.87% for the quarter ended June 30, 2003, reflecting the significant growth in average assets.
Other operating expenses for the six months ended June 30, 2004 increased $4.0 million, from $34.3 million from the first six months of 2003, to $38.4 million in the current period. As explained earlier, the increase is largely due to the increase in compensation, occupancy and advertising expenses as locations, staffing and the volume of activity have expanded while the Bank positions itself for future growth. The increased expenses in the current period also reflect a higher level of cost associated with the collection and disposition of non-performing assets
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and compliance with certain provisions of the Sarbanes-Oxley Act of 2002. Partially offsetting these legal expenses were improved results with respect to the disposition of repossessed real estate, particularly in the quarter ended March 31, 2004, which is included in the Miscellaneous expense line in the income statement.
Income Taxes. Income tax expense was $2.0 million for the quarter ended June 30, 2004, compared to $1.8 million for the comparable period in 2003. The Company's effective tax rates for the quarters ended June 30, 2004 and 2003 were 30.4% and 30.4%, respectively. The effective tax rates in both quarters reflect the recording of tax credits related to certain Community Reinvestment Act investments and the relative amount of taxable income versus tax-exempt income earned in each quarter.
Income tax expense for the six months ended June 30, 2004 increased to $3.9 million, compared to $3.3 million in the comparable period in 2003. The Company's effective tax rates for the six months ended June 30, 2004 and 2003 were 30.3% and 30.4%, respectively. The lower effective tax rate in the current period is primarily a result of an increase in the relative effect of the tax-exempt income and the affordable housing tax credits noted above.
Asset Quality
Classified Assets: State and federal regulations require that the Bank review and classify its problem assets on a regular basis. In addition, in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate, require them to be classified. The Bank's Credit Policy Division reviews detailed information with respect to the composition and performance of the loan portfolio, including information on risk concentrations, delinquencies and classified assets. The Credit Policy Division approves all recommendations for new classified assets or changes in classifications, and develops and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for establishing the appropriate level of the allowance for loan losses. Significant problem loans are transferred to the Bank's Special Assets Department for resolution or collect ion activities. The Board of Directors is given a detailed report on classified assets and asset quality at least quarterly.
Allowance for Loan Losses:In originating loans, the Company recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the credit worthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. As a result, the Company maintains an allowance for loan losses consistent with the GAAP guidelines. The Company increases its allowance for loan losses by charging provisions for probable loan losses against the Company's income. The allowance for losses on loans is maintained at a level which, in management's judgment, is sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon continuing analysis of the factors underlying the quality of the loan portfolio.
At June 30, 2004, the Company had an allowance for loan losses of $28.0 million, which represented 1.47% of total loans and 111% of non-performing loans, compared to 1.51% and 92%, respectively, at December 31, 2003.
During the years ended December 31, 2001 and 2002, the Bank experienced deterioration in asset quality, which had a significant adverse effect on operating results, primarily through increased loan loss provisioning and increased loan collection costs. Collection costs remained high in 2003; however, during the twelve months ended December 31, 2003, the Bank achieved meaningful improvement in asset quality. The Company's asset quality indicators continued to improve in the quarter ended June 30, 2004, resulting in a significant decrease in loan loss provisioning compared to the same period a year earlier. Non-performing assets decreased 22% to $28.9 million, or 1.05% of total assets, at June 30, 2004, compared to $37.1 million, or 1.48% of total assets, at June 30, 2003. Problem loans have been primarily due from borrowers located in the Puget Sound region and are the result of poor risk assessment at the time they were originated, coupled with weakened economic conditions in that area . However, during the year ended December 31, 2003, the Bank had a significant increase in non-performing agricultural loans and agricultural-related business loans due from borrowers located in northeastern Oregon. Generally these problem loans reflect unique operating difficulties for individual borrowers rather than weakness in the overall agricultural economy of the area.
For the quarter ended June 30, 2004, non-performing loans decreased by $2.2 million, although real estate owned and other repossessed assets increased by $1.4 million. At June 30, 2004, the Bank's largest non-performing loan exposure was for loans totaling $5.7 million to a diversified farming operation in northeastern Oregon which were secured by land, crops, receivables and equipment. The Company's next largest non-performing loan exposure encompasses loans totaling $3.7 million to an agricultural-related business operating in northeastern Oregon which are primarily secured by non-farm real estate and processing equipment. Balances for this second group of loans are reflected in the non-accrual loan totals for commercial real estate and commercial business loans at June 30, 2004, in the non-performing assets table on the following page of this report. The Company had five additional non-performing credit relationships with balances in excess of $1.0 million, the two largest of which each had aggregate carrying values of $1.6 million at June 30, 2004. While meaningful progress was made in the past year, reducing non-performing loans and improving asset quality will be important activities to enhance the Bank's operating performance in future periods.
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The following table sets forth information with respect to the Bank's non-performing assets and restructured loans within the meaning of SFAS No. 15,Accounting by Debtors and Creditors for Troubled Debt Restructuring, at the dates indicated (dollars in thousands):
June 30 | December 31 | June 30 | |||||||
2004 | 2003 | 2003 | |||||||
Non-performing assets at end of the period: | |||||||||
Nonaccrual Loans: | |||||||||
Secured by real estate: | |||||||||
One- to four-family | $ | 486 | $ | 1,048 | $ | 1,103 | |||
Commercial | 5,386 | 6,624 | 7,644 | ||||||
Multifamily | -- | -- | -- | ||||||
Construction and land | 2,838 | 5,741 | 10,326 | ||||||
Commercial business | 5,666 | 7,232 | 7,699 | ||||||
Agricultural business, including secured by farmland | 9,691 | 7,320 | 342 | ||||||
Consumer | 51 | 45 | 82 | ||||||
24,118 | 28,010 | 27,196 | |||||||
Loans more than 90 days delinquent, still on accrual: | |||||||||
Secured by real estate: | |||||||||
One- to four-family | 998 | 109 | 736 | ||||||
Commercial | -- | -- | -- | ||||||
Multifamily | -- | -- | -- | ||||||
Construction and land | 98 | 288 | 179 | ||||||
Commercial business | -- | -- | -- | ||||||
Agricultural business, including secured by farmland | -- | -- | 11 | ||||||
Consumer | 43 | 24 | -- | ||||||
1,139 | 421 | 926 | |||||||
Total non-performing loans | 25,257 | 28,431 | 28,122 | ||||||
Real estate owned, held for sale, and other repossessed assets, net | 3,613 | 3,132 | 9,018 | ||||||
Total non-performing assets at the end of the period | $ | 28,870 | $ | 31,563 | $ | 37,140 | |||
Non-performing loans as a percentage of total net loans before | 1.32 | % | 1.65 | % | 1.69 | % | |||
Non-performing assets as a percentage of total assets at end of the period | 1.05 | % | 1.20 | % | 1.48 | % | |||
Troubled debt restructuring at end of the period | $ | -- | $ | 656 | $ | 443 |
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled repayments of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition.
The primary investing activity of the Company, through its subsidiaries, is the origination and purchase of loans and purchase of investment securities. During the six months ended June 30, 2004, the Company purchased loans in the amount of $6.1 million, while loan originations, net of principal repayments, totaled $357.5 million. For the six months ended June 30, 2004, securities purchases net of principal repayments totaled $3.9 million. This activity was funded primarily by principal repayments on loans and securities, sales of loans, deposit growth and borrowings. During the six months ended June 30, 2004, the Company sold $172.2 million of loans, net deposit growth was $161.7 million, FHLB advances decreased $57.5 million and other borrowings increased $18.6 million.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the quarter ended June 30, 2004, the Bank used its sources of funds primarily to fund loan commitments, to purchase securities, to repay FHLB advances and other borrowings, and to pay maturing savings certificates and deposit withdrawals. At June 30, 2004, the Bank had outstanding loan commitments totaling $585.9 million, including undisbursed loans in process totaling $550.1 million. The Bank generally maintains sufficient cash and readily marketable securities to meet short-term liquidity needs. The Bank maintains a credit facility with the FHLB-Seattle, which provides for advances which, in aggregate, may equal the lesser of 35% of the Bank's assets or unencumbered qualifying collateral, up to a total possible credit line of $964.3 mill ion. Advances under this credit facility totaled $555.1 million, or 20% of the Bank's assets, at June 30, 2004.
At June 30, 2004, certificates of deposit amounted to $1.046 billion, or 56% of the Bank's total deposits, including $660.2 million which were scheduled to mature within one year. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Management believes it has adequate resources to fund all loan commitments from customer deposits, FHLB-Seattle advances, other borrowings, principal and interest payments and sale of mortgage loans and that it can adjust the offering rates for savings certificates to retain deposits in changing interest rate environments.
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Financial Instruments with Off-Balance-Sheet Risk
The Bank has financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. As of June 30, 2004, outstanding commitments consist of the following:
Contract or Notional Amount | ||
Financial instruments whose contract amounts represent credit risk: | ||
Commitments to extend credit | ||
Real estate secured for commercial, construction or land development | $ | 247,662 |
Revolving open-end lines secured by 1-4 family residential properties | 23,265 | |
Other, primarily business and agricultural loans | 308,073 | |
Standby letters of credit and financial guarantees | 6,949 | |
Total | $ | 585,949 |
Commitments to sell loans secured by 1-4 family residential properties | $ | 26,261 |
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee a customer's performance or payment to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application stage for periods ranging from 15 to 45 days, the most typical period being 30 days. Typically, pricing for the sale of these loans is locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the customer. The Bank makes every effort to deliver these loans before their rate locks expire. This arrangement generally requires the Bank to deliver the loans prior to the expiration of the rate lock. Delays in funding the loans can require a lock extension. The cost of a lock extension at times is borne by the customer and at times by the Bank. These lock extension costs paid by the Bank are not expected to have a material impact to operations. This activity is managed daily. Changes in the value of rate lock commitments are recorded as other assets and liabilities. See "Derivative Instruments" under Note 1 of the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.
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Capital Requirements
The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as a state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by regulation that require the Company and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires the Company to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Tier 1 total capital to risk-weighed assets as well as Tier 1 leverage capital to average assets. At June 30, 2004 and December 31, 2003, the Company and the Bank exceeded all current regulatory capital requirements. (See Item 1, "Business-Regulation," and Note 18 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission for additional information regarding the Company's and the Bank's regulatory capital requirements.)
The actual regulatory capital ratios calculated for the Company and the Bank as of June 30, 2004, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):
Actual | Minimum for capital adequacy purposes | Minimum to be categorized as "well-capitalized" under prompt corrective action provisions | ||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
(dollars in thousands) | ||||||||||||||||||
June 30, 2004: | ||||||||||||||||||
The Company-consolidated | ||||||||||||||||||
Total capital to risk-weighted assets | $ | 266,016 | 12.67 | % | $ | 167,920 | 8.00 | % | N/A | N/A | ||||||||
Tier 1 capital to risk-weighted assets | 239,056 | 11.39 | 83,960 | 4.00 | N/A | N/A | ||||||||||||
Tier 1 leverage capital to average | 239,056 | 8.86 | 107,895 | 4.00 | N/A | N/A | ||||||||||||
The Bank | ||||||||||||||||||
Total capital to risk-weighted assets | 229,772 | 10.96 | 167,669 | 8.00 | $ | 209,586 | 10.00 | % | ||||||||||
Tier 1 capital to risk-weighted assets | 202,851 | 9.68 | 83,834 | 4.00 | 125,751 | 6.00 | ||||||||||||
Tier 1 leverage capital to average | 202,851 | 7.53 | 107,702 | 4.00 | 134,627 | 5.00 |
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ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Asset/Liability Management
The financial condition and operation of the Company are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. The Company's profitability is dependent to a large extent on its net interest income, which is the difference between the interest received from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution's earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution's assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities and off-balance-sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets. Additional interest rate risk results from mismatched repricing indices and formulae (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customers than to the Company. An additional exception to these generalizations in the current market environment has been the beneficial effect of interest rate floors on many of the Company's floating rate loans which have helped maintain higher loan yields despite declining levels of market interest rates. However, in the current low interest rate environmen t, these rate floors have declined over time. Further, because these rate floors exceed what would otherwise be the note rate on certain variable or floating rate loans, those loans will be less responsive to increasing market rates than has historically been the case, injecting an additional element of interest rate risk into the Company's operations.
The principal objectives of asset/liability management are to evaluate the interest-rate risk exposure of the Company; to determine the level of risk appropriate given the Company's operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage the Company's interest rate risk consistent with regulatory guidelines and approved policies of the Board of Directors. Through such management, the Company seeks to reduce the vulnerability of its earnings and capital position to changes in the level of interest rates. The Company's actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of the Company's senior management. The Committee closely monitors the Company's interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions, and a ttempts to structure the loan and investment portfolios and funding sources of the Company to maximize earnings within acceptable risk tolerances.
Sensitivity Analysis
The Company's primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. The Company also utilizes market value analysis, which addresses changes in estimated net market value of equity arising from changes in the level of interest rates. The net market value of equity is estimated by separately valuing the Company's assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net equity value to changes in interest rates and pr ovides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model. The Company updates and prepares simulation modeling at least quarterly for review by senior management and the Board of Directors. The Company believes the data and assumptions are realistic representations of its portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of the Company's net interest income and net market value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used.
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The table ofInterest Rate Risk Indicators sets forth, as of June 30, 2004, the estimated changes in the Company's net interest income over a one-year time horizon and the estimated changes in market value of equity based on the indicated interest rate environments.
Interest Rate Risk Indicators
Estimated Change in | |||||||||||||
Change (in Basis Points) in | Net Interest Income | Net Market Value | |||||||||||
(dollars in thousands) | |||||||||||||
+300 | (3,182 | ) | (3.5 | %) | (89,894 | ) | (43.3 | %) | |||||
+200 | (2,450 | ) | (2.7 | %) | (57,076 | ) | (27.5 | %) | |||||
+100 | (2,219 | ) | (2.4 | %) | (26,280 | ) | (12.7 | %) | |||||
0 | 0 | 0.0 | 0 | 0.0 | % | ||||||||
-50 | 1,073 | 1.2 | % | 2,265 | 1.1 | % | |||||||
-100 | (86 | ) | (0.1 | %) | 4,104 | 2.0 | % |
__________
(1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities.
Another, although less reliable, monitoring tool for assessing interest rate risk is "gap analysis." The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest sensitive" and by monitoring an institution's interest sensitivity "gap." An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest sensitive assets exceeds the amount of interest sensitive liabilities. A gap is considered negative when the amount o f interest sensitive liabilities exceeds the amount of interest sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe interest rate increase.
The table ofInterest Sensitivity Gappresents the Company's interest sensitivity gap between interest-earning assets and interest-bearing liabilities at June 30, 2004. The table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future periods shown. At June 30, 2004, total interest-bearing assets maturing or repricing within one year was less than total interest-earning liabilities maturing or repricing in the same time period by $123.6 million, representing a one-year gap to total assets ratio of (4.48%).
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Table 16: Interest Sensitivity Gap as of June 30, 2004 | Within | After 6 | After 1 Year | After 3 | After 5 Years | Over | Total | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||||
Interest-earning assets: (1) | |||||||||||||||||||||
Construction loans | $ | 283,272 | $ | 2,229 | $ | 6,973 | $ | 42 | $ | -- | $ | -- | $ | 292,516 | |||||||
Fixed-rate mortgage loans | 75,821 | 57,025 | 124,555 | 99,619 | 116,355 | 30,412 | 503,787 | ||||||||||||||
Adjustable-rate mortgage loans | 259,592 | 60,052 | 139,484 | 119,172 | 4,382 | -- | 582,682 | ||||||||||||||
Fixed-rate mortgage-backed securities | 23,710 | 22,319 | 72,150 | 51,123 | 80,781 | 51,174 | 301,257 | ||||||||||||||
Adjustable-rate mortgage-backed securities | 17,954 | 6,621 | 19,260 | 13,735 | 23,580 | -- | 81,150 | ||||||||||||||
Fixed-rate commercial/agricultural loans | 52,678 | 18,706 | 36,767 | 15,704 | 6,653 | 36 | 130,544 | ||||||||||||||
Adjustable-rate commercial/agricultural loans | 324,361 | 6,365 | 5,242 | 5,989 | 170 | -- | 342,127 | ||||||||||||||
Consumer and other loans | 41,637 | 5,624 | 12,129 | 3,744 | 2,070 | 311 | 65,515 | ||||||||||||||
Investment securities and interest-earning deposits | 28,825 | 100 | 28,855 | 146,958 | 13,148 | 93,405 | 311,291 | ||||||||||||||
Total rate sensitive assets | 1,107,850 | 179,041 | 445,415 | 456,086 | 247,139 | 175,338 | 2,610,869 | ||||||||||||||
Interest-bearing liabilities: (2) | |||||||||||||||||||||
Regular savings and NOW accounts | 49,056 | 49,055 | 114,462 | 114,462 | -- | -- | 327,035 | ||||||||||||||
Money market deposit accounts | 124,828 | 74,896 | 49,931 | -- | -- | -- | 249,655 | ||||||||||||||
Certificates of deposit | 499,267 | 160,962 | 294,934 | 75,853 | 15,136 | 49 | 1,046,201 | ||||||||||||||
FHLB advances | 283,600 | 25,000 | 95,600 | 60,930 | 89,928 | -- | 555,058 | ||||||||||||||
Other borrowings | 40,847 | -- | -- | -- | -- | -- | 40,847 | ||||||||||||||
Trust preferred securities (new) | 72,168 | -- | -- | -- | -- | -- | 72,168 | ||||||||||||||
Retail repurchase agreements | 30,717 | 140 | 406 | -- | 428 | -- | 31,691 | ||||||||||||||
Total rate sensitive liabilities | 1,100,483 | 310,053 | 555,333 | 251,245 | 105,492 | 49 | 2,322,655 | ||||||||||||||
Excess (deficiency) of interest-sensitive assets over | $ | 7,367 | $ | (131,012 | ) | $ | (109,918 | ) | $ | 204,841 | $ | 141,647 | $ | 175,289 | $ | 288,214 | |||||
Cumulative excess (deficiency) of interest-sensitive assets | $ | 7,367 | $ | (123,645 | ) | $ | (233,563 | ) | $ | (28,722 | ) | $ | 112,925 | $ | 288,214 | $ | 288,214 | ||||
Cumulative ratio of interest-earning assets to | 100.67 | % | 91.23 | % | 88.12 | % | 98.70 | % | 104.86 | % | 112.41 | % | 112.41 | % | |||||||
Interest sensitivity gap to total assets | 0.27 | % | (4.75 | )% | (3.98 | )% | 7.42 | % | 5.13 | % | 6.35 | % | 10.44 | % | |||||||
Ratio of cumulative gap to total assets | 0.27 | % | (4.48 | )% | (8.46 | )% | (1.04 | )% | 4.09 | % | 10.44 | % | 10.44 | % | |||||||
(footnotes on following page)
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Footnotes for Table of Interest Sensitivity Gap
(1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the periods in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for allowances for loan losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts.
(2) Adjustable- and variable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature. Although the Bank's regular savings, NOW and money market deposit accounts are subject to immediate withdrawal, management considers a substantial amount of such accounts to be core deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one year cumulative gap of interest-sensitive assets would have been negative $402.5 million, or (14.6%) of total assets. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits which are included in the average balance calculations in the table included in the Comparison of Results of Operations for the Quarters and Six Months ended June 30, 2004 and 2003.
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ITEM 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of Company disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Act)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within t he time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2004, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, the Company and the Bank have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Bank holds a security interest. The Company and the Bank are not a party to any pending legal proceedings that management believes would have a material adverse effect on the financial condition or operations of the Company.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number of Shares that May yet be Purchased Under the Plan | |||||||
Beginning | Ending | ||||||||||
January 1, 2004 | January 31, 2004 | -- | $ | -- | -- | ||||||
February 1, 2004 | February 29, 2004 | -- | $ | -- | -- | ||||||
March 1, 2004 | March 31, 2004 | 7,729 | $ | 28.059 | -- | ||||||
April 1, 2004 | April 30, 2004 | 7,674 | $ | 27.734 | -- | ||||||
May 1, 2004 | May 31, 2004 | -- | $ | -- | -- | ||||||
June 1, 2004 | June 30, 2004 | 4,279 | $ | 28.725 | -- | ||||||
Total | 19,682 | $ | 28.077 | -- | 100,000 | (2) |
(1) | Shares indicated as purchased during the periods presented were acquired at current market values as consideration for the exercise of certain fully vested options. |
(2) | On July 24, 2003, the Company's Board of Directors authorized the repurchase of up to 100,000 shares for the Company's outstanding common stock over the next twelve months. As of June 30, 2004, no shares had been repurchased under this program. |
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
The annual meeting of stockholders of the Company was held on April 22, 2004. At the annual meeting there were a total number of 11,551,623 shares eligible to vote of which 10,457,982 were received or cast at the meeting. The result of the vote on the election of directors was as follows:
The following individuals were elected as directors:
FOR | WITHHELD | ||||||
# of votes | Percentage of | # of votes | Percentage of | ||||
Robert D. Adams | 10,300,196 | 98.49% | 157,786 | 1.51% | |||
Edward L. Epstein | 10,320,963 | 98.69% | 137,019 | 1.31% | |||
Wilber Pribilsky | 10,319,336 | 98.67% | 138,646 | 1.33% | |||
Gary Sirmon | 10,319,481 | 98.68% | 138,501 | 1.32% | |||
Michael M. Smith | 10,320,660 | 98.69% | 137,322 | 1.31% |
The terms of Directors Gordon E. Budke, David B. Casper, Jesse G. Foster, D. Michael Jones, Dean W. Mitchell and Brent A. Orrico continued.
Item 5. Other Information
Not Applicable
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Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
31.1 | Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-15(e) | |
and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 9, 2004. | ||
31.2 | Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-15(e) | |
and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 9, 2004. | ||
32 | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 9, 2004. |
(b) Report(s) on Form 8-K filed during the quarter ended June 30, 2004, are as follows:
Date Filed | Purpose |
April 22, 2004 | Announce Banner Corporation financial results for the quarter ended March 31, 2004 (Items 7 and 12). |
June 14, 2004 | Announce the decision of the Audit Committee of the Board of Directors to dismiss Deloitte & Touche LLP and to engage Moss-Adams LLP as the Registrant's certifying accountants for the fiscal year ended December 31, 2004 (Items 4 and 7). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
�� Banner Corporation
August 9, 2004 /s/ D. Michael Jones
D. Michael Jones
President and Chief Executive Officer
(Principal Executive Officer)
August 9, 2004 /s/ Lloyd W. Baker
Lloyd W. Baker
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-15(e) AND 15d-15(e) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, D. Michael Jones, certify that: | ||
1. | I have reviewed this Quarterly Report on Form 10-Q of Banner Corporation; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: | |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: August 9, 2004 /s/ D. Michael Jones
D. Michael Jones
Chief Executive Officer
<PAGE>
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-15(e) AND 15d -15(e) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Lloyd W. Baker, certify that: | ||
1. | I have reviewed this Quarterly Report on Form 10-Q of Banner Corporation; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: | |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: August 9, 2004 /s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
<PAGE>
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF BANNER CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that:
* the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended, and
* the information contained in the report fairly presents, in all material respects, the Company's financial condition
and results of operations.